From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Benchmark rates around the world have been rolling over as uncertainty sweeps across markets.
Despite the growing pessimism among investors, global yields are digging in at critical levels and bouncing higher in recent sessions.
We discussed how international yields – particularly those in developed Europe – confirmed the new highs in US rates earlier in the year.
Today, we’re going to check in on some of those same yields and see if this is still a piece of confirming evidence for rates here in the US.
With the US 10-year hovering around its breakout level at last year’s highs we’re looking for any clues we can get for whether or not these new highs are here to stay.
If the new highs in global yields are holding, that would go a long way in supporting the upside resolution in the US 10-Year.
On the other hand, if we start to see more and more yields around the world fail and roll over, the US will likely follow.
Let’s start with the US 10-year yield:
After testing the 2021 first-half highs around 1.75 earlier in the month, the US 10-year is rebounding off this former resistance zone and rallying higher once again.
This is a logical place to see a short-term trough. And this kind of action makes sense, given commodities continue to rip higher.
As long as the 10-year is above those former highs we’re in an environment where we want to remain net sellers of bonds.
On the other hand, if it loses those former highs, expect a messy market for both bonds and risk assets.
Now let’s look at rates around the globe for an indication of where things are likely headed here at home.
Here's the German benchmark yield:
The joke last month was that the German 10-year was challenging resistance at zero. Fast-forward to today, and we’re asking ourselves if that same level will turn into support!
All kidding aside, the action in the German yield resembles its US counterpart. It’s digging in near its highs from last year and bouncing to the upside.
Seeing one of the most important credit markets remain resilient is constructive for higher rates in the US and throughout the developed world.
The UK 10-year is another European yield suggesting rates remain on the rise:
It retested its first-half highs from last year in early December and has continued to carve out a series of higher highs and higher lows in the time since. This is another data point supporting a rising rate environment.
Finally, let's turn our attention to Asia.
Similar to the US and German 10-year yields, the Japanese benchmark is in the process of testing a key level:
But, unlike its peers, it hasn’t experienced the same kind of reaction at its old highs.
Instead of rebounding off this level, the Japanese 10-Year is chopping sideways and appears vulnerable. The big question is whether or not it will hold. The former 2021 high near 17 basis points is our line in the sand.
With upside resolutions in other significant benchmark rates as our backdrop, we believe it’s just a matter of time before the Japanese 10-year follows suit.
If it doesn’t and slips back within its prior range, we want to monitor other global yields in anticipation of more potential failed breakouts.
We’ll continue to watch the Japanese 10-year for signs of confirmation.
The bottom line is global yields remain buoyant as they hold the line – that's their respective 2021 highs.
On the flip side, if benchmark yields worldwide begin to lose those key levels, then risk assets, in general, are most likely to come under further selling pressure.
We’ll want to shift to a more defensive posture if this ends up being the case.
To be clear, that is not the message global credit markets are sending us right now.
We want to focus on the areas of the market that benefit most from a rising rate environment as long as these yields continue to hold – such as commodities, commodity-related stocks, and cyclical/value sectors.
These sectors and industry groups have been at the top of our bottoms-up scans for months now, and we don’t see that changing if rates keep climbing.
We’ll keep you posted on how things shake out for the bond market in the coming weeks.
Stay Tuned!
Countdown to FOMC
Following Fed Chair Jerome Powell's recent congressional testimony, the market is pricing in a 25 basis point rate hike at the March meeting.
Here are the target rate probabilities based on fed funds futures:
This data is from the CME FedWatch Tool as of March 9, 2022.
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Bond Report!
